At 5%, BoE hikes key interest rate to 15-year high in fight against inflation; check details
- The higher-than-expected 13th hike in a row, to a 15-year peak, came one day after data showed UK annual inflation remaining at 8.7 per cent to defy expectations of a slowdown.
The Bank of England (BoE) on June 22 lifted its key interest rate by a half-point to five per cent or 50 basis points (bps) to tackle stubbornly high UK inflation. The nine-member Monetary Policy Committee voted 7-2 for an increase in key rate to 5 per cent, the highest level in 15 years and the biggest move since February. Markets had priced in only a 40 per cent chance of a half-point hike, with most economists anticipating a quarter point.
The higher-than-expected 13th hike in a row, came one day after data showed that UK annual inflation remaining at 8.7 per cent to defy expectations of a slowdown. "There had been significant upside news in recent data that indicated more persistence in the inflation process," the BoE said in the gathering's minutes.
Also Read: At 3.25%, ECB hikes rates to 22-year high as it battles inflation; signals further policy tightening
The BoE retained its previous guidance on future policy, which stated that if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.
Policymakers led by Governor Andrew Bailey reiterated earlier guidance pointing toward higher rates. They said nothing to rein in market expectations for rates peaking around 6 per cent by early next year - which would be the highest in over two decades.
A half-point hike was in stark contrast to the Federal Reserve, which last week pressed pause on US rate hikes after a sharp easing in the country's inflation. The European Central Bank last week raised its borrowing costs by a quarter point. The Swiss and Norwegian central banks hiked their rates on Thursday.
“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” Bailey wrote in a letter to Chancellor of the Exchequer Jeremy Hunt. “Bringing inflation down is our absolute priority. The MPC will do what is necessary to return inflation to the 2 per cent target,'' he added.
The decision suggests UK borrowing costs could keep rising through the summer even after the US Federal Reserved paused its tightening spree. Britain remains an outlier in the Group of Seven (G7) nations, with consumer prices rising four times the BOE’s two per cent target in May and more than double the rate in the US.
For borrowers, the rate hike signals further hardship. Two year mortgage rates have tripled to more than 6 per cent since March 2022. With at least 800,000 fixed mortgages due to move on to significantly higher rates in the second half of this year, lawmakers are starting to blame the BOE for failing to halt inflation earlier, according to Bloomberg.
Prime Minister Rishi Sunak’s government is also facing calls to help struggling borrowers but has so far resisted them for fear of undermining the BOE. If rates hit market forecasts of 6 per cent, the UK will collapse into recession, according to Bloomberg Economics.
The BoE also noted on Thursday that it would keep a close eye on the impact on mortgage costs, as well as rising costs in Britain's rental market. Last month, the central bank estimated that inflation would fall to just over 5 per cent by the end of this year and be below its 2 per cent target in early 2025.
Sunak has made slashing the pace of price rises a priority for his Conservative government as it heads into a general election next year. The BoE began lifting its key interest rate from a record low of 0.1 per cent at the end of 2021, with inflation starting to rise as economies slowly emerged from lockdowns.
Britain's economy has dodged a widely expected recession so far in 2023, as it was hit by the shock of Brexit along with the COVID-19 pandemic and the surge in gas prices caused by Russia's invasion of Ukraine.
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